Considering the number of separated relationships, an explanation of spousal support from a tax reporting perspective is often needed to help people prepare their taxes.
In general, if there is a court order requiring “regular periodic basis payments” that permit the recipient “discretion as to the use of the amount”, then Canada Revenue Agency (CRA) allows the payer to deduct the spousal support payments as an expense from income and requires the recipient to report the spousal support payments as income.
To be clear, these CRA rules are referring to the reporting of spousal support, not child support. However, if there is also child support involved, it can have an effect on the reporting of spousal support – more on this later.
An occasional lump sum spousal support payment is not reported by either party on their tax return unless the lump sum is an arrears payment due to missed regular payments, or an acceleration payment if prepayment of regular payments makes sense to the parties.
Another exception for lump sum payments of which CRA requires reporting occurs when a court order specifies payment for identified expenses like rent, mortgage, medical, tuition, and the like.
CRA will waive the “regular periodic” and “discretion” requirements and treat this spousal support as a deductible expense for the payer and reportable income for the recipient.
By the way, until a court order is in place, spousal support payments are not reported to CRA by either party, unless the court order when completed states a retroactive reporting requirement, and in that case, it’s applicable to only the preceding tax years stated in the court order.
If child support and spousal support are all involved in the separation, any shortfall on the total support paid is assumed by CRA to be a shortfall of spousal support – the kids’ cash comes first.
The shortfall becomes spousal support in arrears, not child support in arrears. The amount of spousal support reported on the tax returns is only that amount, if any, above the required child support amount.
To state the obvious then, the legal docs should clearly identify the amount of child support and clearly identify the spousal support.
If the two amounts are not separately stated, the entire amount of support is assumed to all be child support and therefore nothing is reported to CRA on the tax returns as spousal support.
These are difficult conversations sometimes, but once past the emotion, unambiguous paperwork does move the process forward relatively simply. Adding to the importance of having clear documentation, the review of spousal support, and child support too, is not an uncommon request by CRA.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.
